The President and the Bureaucracy

In the strict constitutional sense, the U.S. president has few powers. However, as popular expectations of an active president have grown—which some scholars attribute to the modern media’s disproportionate focus on the presidency—U.S. presidents have sought to augment their office with additional powers. Since at least FDR, presidents have sought a greater role in crafting and influencing legislation. The Constitution’s unambiguous grant of legislative authority to Congress (and Congress’ tendency to jealously guard its prerogatives) limits the scope of presidential involvement in that sphere. However, since at least Nixon, U.S. presidents have focused their energies on consolidating control over the executive branch where, as that branch’s nominal head, the limits of presidential power are less obvious and where cumulative congressional delegations have created an attractive repository of discretionary authority.

Though mostly creatures of Congress and guarded by the courts, executive agencies have proven susceptible to various forms of presidential influence. Presidents have employed several strategies to influence the actions of other government officials—such as “going public” with their proposals to pressure officials, issuing executive orders, and altering legislative mandates through the use of signing statements (See Kernell 1997, Waterman 2009). One tool of presidential control of the bureaucracy is discussed below: regulatory review through the Office of Management and Budget (OMB). For reasons I discuss below, where the President’s preferences conflict with other institutional actors, OMB may only prove useful as a tool of negative agenda control.

The formal powers of the presidency can be found in Article II of the U.S. Constitution. Section 1, known as the Vesting Clause, declares that “The executive Power shall be vested in a President of the United States of America” (U.S. Const., Art. II, Sec. 1). In Section 2, the president is declared Commander in Chief of the U.S. Armed Services, given limited power of appointment, pardon, and the ability to make treaties. Only the pardon power is unaccompanied by an explicit congressional check. In addition to appointing the heads of governmental departments, the president “may require the Opinion, in writing, of the principal Officer in each of the executive Departments, upon any Subject relating to the Duties of their respective Offices” (Id. at Sec. 2). Finally, in Section 3, in what is known as the Take Care Clause, the president is charged to “take Care that the Laws be faithfully executed” (Id. at Sec. 3). Though light on explicit grants of substantive authority, there is enough vagueness—especially in the vesting and take care provisions—for proponents of expansive presidential power to argue for the constitutionality of presidential control over administration generally.

But presidents have not always been understood to have much more than a coordinating role in the administrative sphere. Elena Kagan points out in her widely cited article, “Presidential Administration” (2001), that in 1979,

an influential report by the American Bar Association had noted that Presidents historically “ha[d] shunned direct intervention” in rulemaking and that they “ha[d] been loath to let it appear that they were influencing regulatory agencies, even those within the executive branch, to write their regulations one way rather than another” (Kagan 2001, 2277).

Kagan also details the evolution of the administrative presidency. In 1921, Congress, after a succession of presidential complaints, enacted the Budget and Accounting Act which established the Bureau of the Budget. Housed within the Treasury but directly linked to the President, the Bureau’s purpose was to oversee and coordinate all agency budget requests and provide the President with a fiscal lever over administrative policy. In 1937, following the Brownlow Committee Report finding that increasing demands on the President required greater administrative tools, the Executive Office of the President was formed and within it was placed an enhanced Bureau of the Budget. In 1949, following the Hoover Commission Report, several other reforms were adopted “to ‘cut[] through the barriers that have in many cases made bureaus and agencies practically independent of the Chief Executive,’ and to create ‘a clear line of command from the top to the bottom, and a return line of responsibility and accountability from the bottom to the top’” (Id. at 2275).

Consolidation of presidential power over the bureaucracy continued through presidential orders even apart from Congress. In 1970, President Nixon redesignated the Bureau of the Budget as the Office of Management and Budget (OMB) and began to bring nonbudgetary matters under its aegis. The OMB soon began circulating rules proposed by agencies to other agencies for comment before sending the rule back to the initiating agency for further review, a substantial precedent for presidential involvement in individual rulemakings. Ford and Carter continued this practice and increasingly began insisting on regulatory cost analysis and the exploration of alternative approaches to solving certain problems.

But it was in the Reagan era that the OMB really grew teeth. As Kagan explains,

Executive Order 12,291, issued during Reagan’s first month in office, established the system: the order required executive—but not independent—agencies to submit to OMB’s Office of Information and Regulatory Affairs (OIRA) for pre-publication review any proposed major rule, accompanied by a “regulatory impact analysis” of the rule, including a cost-benefit comparison. The order also outlined substantive criteria to govern agency rulemaking: “to the extent permitted by law,” an agency could regulate only if the benefits of doing so exceeded the costs and the choice among alternatives “involv[ed] the least net cost to society.” Although the order and the legal opinion supporting it explicitly disclaimed any right on the part of OMB, or the President himself, to dictate or displace agency decisions, the order effectively gave OMB a form of substantive control over rule- making: under the order, OMB had authority to determine the adequacy of an impact analysis and to prevent publication of a proposed or final rule, even indefinitely, until the completion of the review process (Id. at 2277-78).

Reagan used his assumed OIRA-mediated review authority to review major rules and put the burden on the agencies to justify their proposed course of action in strict cost-benefit terms, which often meant severe delay, substantial alteration of proposed rules, and often the abandonment of rulemakings altogether. It should be observed that OMB retained its ability to oversee annual budget requests to Congress by executive agencies (as well as some of the independent regulatory agencies) even as it began executing centralized regulatory review through OIRA (See Moe 1982).[1]

With the twin powers of centralized review and budget control, the OMB appears to be an important tool of presidential control over the bureaucracy. Wood and Waterman (1991) observe that “The OMB monitors the activities of bureaucracies, both their efficiency and their compatibility with the president’s program…” (805) But the actual impact of the OMB is still unclear. Through its ability to send a rule back for review or alter an agency’s budget requests, the OMB might be better suited for obstructing agency action inconsistent with presidential priorities than directing agency activity. Eisner et al report that, during the 1980’s, Reagan was able to use OMB to bring the EPA to a practical standstill: “over half the agency’s proposed regulations were rejected or revised, and several cost-benefit analyses were manipulated for admitted political ends in an effort to scuttle environmental regulations” (Eisner et al 2006, 158). Hence, “the pace of issuing regulations at the EPA dropped dramatically under EO 12291 and the intense scrutiny these regulations received from the OMB” (Id. at 159).


While the EPA example demonstrates the power of the OMB to obstruct agency action, there are two reasons not to read too much into the usefulness of the OMB even as a tool of negative agenda control. First, as Eisner and his coauthors indicate, even to pull off the budgetary reduction, Reagan required help from his political appointee at the agency. Anne Gorsuch-Burford not only “supported the president’s budgetary requests,” but “crippled the EPA’s enforcement apparatus, and stressed voluntary compliance with pollution laws—all radical departures from the strategies of her predecessors” (Id. at 158). So it seems it was the appointment power (which is shared with Congress) that proved more decisive in Reagan victory over the EPA, not mere OMB review.

This observation is supported by another empirical study of the period. Wood and Waterman (1991) used time series analysis to study variation in agency output across seven agencies (including the EPA) during the late Carter and early Reagan administrations. Though they do not explicitly measure the impact of OMB review, they do include changes in budget along with an assortment of other political control variables. They found only a limited impact from budgetary changes, but “the case studies demonstrate that political appointment—a shared tool of the president and Congress—is very important. In five of the seven programs we examined, agency outputs shifted immediately after a change in agency leadership” (822).

The EPA example provides another reason to doubt even the obstructive power of the OMB: the capacity of other institutional actors to counter. Rank and file members of the agency alerted Congress, and members of the agency’s constituency rallied to pressure enforcement of applicable environmental laws through the courts and in the media. In response, Congress passed significant amendments to the CERCLA and CWA which constrained the agency’s discretionary enforcement of environmental standards and held Gorsuch-Burford in contempt of Congress. When she resigned, the Reagan administration nominated William Ruckelshaus, a conciliatory replacement, to ensure confirmation. This bit of history highlights the fact that Congress creates and authorizes agency activity and, through selective enfranchisement of constituencies (discussed in my post “The Congress and the Bureaucracy”), empowers other interested watchdogs to seek recourse, often through the courts (See Rathbun 2009; See also Cann 2006, 22-23 where he highlights a similar example of court-mediated interest group pushback surrounding NHTSA rulemakings in the 1990’s).

The president is thus one of several principals and the OMB one of many tools of control in a very competitive policy environment. The importance of the OMB probably depends a lot on the president’s goal with respect to agency action as well as the number, vitality, and vigilance of other actors in the policy subsystem. If the president seeks merely to halt or slow rulemakings in a given policy arena, and the issue is not very salient or attended by selectively enfranchised groups, he may largely have his way indefinitely (See Gormley & Balla 2013, esp. Ch. 5). But affirmatively directing agency action through the OMB seems unlikely, and obstruction of rulemakings in policy domains with vital and active subgroups with statutory standing to challenge may prove unsustainable. OMB review and budgetary power perhaps works best at the margins of rulemaking where its actions are routinized, rationalizable, and, for most outsiders, obscure. OMB review under George W. Bush and Barack Obama—each with their own version of Reagan’s EO 12291—permit the consideration of factors other than strict cost-benefit analysis (See Chu & Shedd 2012). This softens the strict standard of Reagan-era review and perhaps makes OMB action less controversial and therefore easier to sustain.


[1]See Harvard law professor (though better-known for his career at U Chicago) and author of Nudge, Cass Sunstein, discuss his tenure as OIRA’s administrator:


The Congress and the Bureaucracy

Congress has a dual role in the American system of government. In relation to executive agencies, it serves as principal. Congress enacts laws which create, structure, authorize, and fund executive agencies. Congressional committees and subcommittees are charged with monitoring and disciplining agencies within their respective purview. On the other hand, in relation to the American electorate, Congress serves as agent. Each member of Congress is electorally accountable to a well-defined geographic constituency and serves at the pleasure of that constituency. Members of Congress must employ the bureaucracy as an effective instrument of constituent service to achieve re-election. The complexities of the policy environment inform Congress’ methods of employing the bureaucracy to provide the public goods on which each member’s electoral fate depends. Importantly, limited time and cognition among members of Congress combined with the selective attention of the public leads Congress to pursue a decentralized, largely automatic oversight approach which shifts much of the costs of monitoring and enforcement to third parties. This method is largely effective but susceptible to the introduction of bias in policy making.

Early scholarship on congressional control of the bureaucracy assumed agency independence under perfunctory and ineffectual congressional oversight. Principal-agent theory provided support for this proposition. Information-asymmetry between a preoccupied, non-expert Congress and the career bureaucrats under its charge makes monitoring agency compliance difficult and costly. An agency’s direct, routine contact with both the objects and putative beneficiaries of regulatory output contributes to this asymmetry. Even when noncompliance is detected, congressional sanctions require the costly coordination of members of Congress to pass new legislation. Taken together, these principal-agent problems and the apparent cursory nature of observed congressional oversight activities engendered a widely held view of a bureaucracy largely unanswerable to Congress and insulated from the democratic process. For scholars optimistic about the possibility of objective scientific policy making predicated on emerging welfare economics, this insularity was a great boon. For many others, insulation from the democratic process rendered the work of a popularly unaccountable bureaucracy inherently suspect.

By the 1980’s, several scholars began questioning the assumption of agency independence. Weingast and Moran (1983) postulated that the traditional model of bureaucratic discretion and their then-heterodox model of congressional control yielded facially equivalent observations. Using the paradigmatic FTC controversy of the late 1970’s as an empirical test-case, Weingast and Moran show that—far from being a runaway agency—the FTC’s consumerist policies from the mid-1960’s through the mid-1970’s were in harmony with the preferences of its direct overseers in Congress. The discordance in the late 1970’s between the commission and its congressional principals resulted from an abrupt change in the preferences of the principals arising from a nearly complete turnover in the Senate oversight committee after 1976. “The 1979 and 1980 hearings were simply the most visible culmination of this process” (777).  In a logit analysis, Weingast and Moran used ADA scores as a measure of subcommittee panel preferences and test for the influence of changes in subcommittee preferences on the degree of consumerist activism in FTC case selection. Rather than a runaway agency, they found that “the FTC is remarkably sensitive to changes in the composition of its oversight subcommittee and its budget” (792). This examination of the FTC yielded evidence of latent congressional control.

How could such effective oversight be overlooked? McCubbins and Schwartz (1984) posit that “what has appeared to scholars to be a neglect of oversight…really is a preference for one form of oversight over another, less effective form” (165). They distinguish two oversight techniques that Congress might employ. The first, police-patrol oversight, is a costly command and control technique requiring such activities as “reading documents, commissioning scientific studies, conducting field observations, and holding hearings to question officials and affected citizens” (166). The second, fire-alarm oversight, is a decentralized incentive-based technique which co-opts affected parties and the courts as monitors and enforcers of agency policy. This indirect and less visible oversight strategy has its advantages: “although [it] can be as costly as police-patrol oversight, much of the cost is borne by the citizens and interest groups who sound alarms and by administrative agencies and courts rather than by congressmen themselves” (168).

fire alarm

How is this indirect, cost-shifting form of oversight implemented? McCubbins, Noll, and Weingast (1987) provide the more elaborate answer. Congress, they argue, carefully crafts—and, when necessary, tweaks—administrative procedures to enfranchise favored groups in an agency’s decision making process. This selective enfranchisement may take the form of shifting the burden of proof in agency determinations, granting standing to certain parties to challenge agency action in court, calibrating the level of judicial review, and requiring the collection and dissemination of relevant information. This strategy ‘locks in’ a stable yet adaptable arrangement capable of self-perpetuation: “Whereas political officials may not know what specific policy outcome they will want in the future, they will know what interests ought to influence a decision and what distributive outcomes will be consistent with the original coalitional arrangement” (255). This indirect oversight method also gives members of Congress the ability to distance themselves from unpopular policy determinations as well as the option of performing constituent service on an ad hoc basis by applying pressure to an agency where and as needed. Finally, “the courts are the key, for without them political actors could not rely on decentralized enforcement” (id.).

But some scholars warn that fire-alarm oversight by election-conscious political leaders can have unintended consequences for the content of policy. If Congress is not monitoring agencies directly, it must receive relevant information from others. The sources of information would include affected parties, the media, and, through procedural reporting requirements, the agency itself. These information flows certainly help congressional principals cope with information costs. However, as Hopenhayn and Lohmann (1996) observe, “the amount of information received by the principal need not be independent of the agency’s decision” (197). Hopenhayn and Lohmann ask us to consider an example from Kazman (1991):

 There are two types of errors the FDA can make in reviewing a new drug application: it can approve a drug that turns out to have unexpectedly adverse side effects, or it can delay or deny a beneficial drug. From a public health standpoint, both of these errors can be equally deadly, but from a political standpoint, they are worlds apart. Incorrectly approving a drug can produce highly visible victims, highly emotional news stories, and heated congressional hearings … Incorrectly delaying a drug, on the other hand, will produce invisible victims and little more … Not surprisingly, the FDA’s fundamental approach to drug approval is designed to reduce the likelihood of the first type of error while paying little attention to the second. The well-documented result of this excessive caution is drug lag-the frequent unavailability of major new drugs in this country long after they have been approved elsewhere (Kazman 1991 as quoted in id.).

Kazman’s observation can be taken further, I think. Due to the availability bias observed above, it is not only the incorrect approval of a drug that can be politically toxic, but approval of any drug likely to result in a significant number of adverse outcomes, even if those outcomes are greatly eclipsed by the beneficial effects of granting access to the treatment. Adverse consequences traceable to agency action is likely to bring heat on the agency in the form of media scrutiny and public outrage. Even if the agency’s actions are defensible, election-conscious members of Congress might prove more likely to grandstand against an agency under fire than take the heat on themselves.

Agency officials throughout the bureaucracy are certainly aware of the vacillating tendencies of their congressional principals and are, therefore, likely to exhibit extreme risk aversion in their decision making. This bias is likely to escape the notice of a congressional principal concerned mainly with a cost-effective method of pleasing its own principal. Thus, while Congress may have found a cost-effective means of employing the bureaucracy in support of its own electoral goals, the true cost is perhaps imponderable: the countless “invisible victims” described by Kazman.

How does the re-election incentive affect Congress’ ability to control the bureaucracy? I argue here that Congress pursues an indirect, incentive-based approach to controlling the bureaucracy which uses administrative procedure to shift the costs of monitoring and enforcement to other parties. This is a cost-effective method for Congress to employ the bureaucracy as an instrument of constituent service, but also may introduce welfare reducing risk-aversion bias into some areas of public policy.


Administrative Agencies and Policymaking: A Look at the Process

Federal administrative agencies exercise their policymaking powers in several different ways. The conventional way to describe agency activity is to distinguish between rulemakings and adjudications, each of which can be further subdivided into formal and informal types. In this post, I describe the features of each of these four types of agency action and offer some comments about the relative merits of each as a policymaking vehicle. Specifically, I discuss the degree to which each of these types of agency activity allows an agency’s expertise to work, facilitates democratic accountability, and protects the rights of the regulated.

I don't make the rules


In rulemaking an agency is said to operate in a quasi-legislative capacity. Through this process, the agency formulates rules which shall apply to regulated entities in a general and prospective manner to achieve policy ends which are embodied in the agency’s enabling legislation. Essentially, Congress, through legislation, lays out policy in broad terms and it often falls to administrative agencies to work out the particulars—in essence to sub-legislate under a delegation of congressional authority in order to achieve Congress’ policy goal. Some legislative enactments are quite vague. For example, anti-trust legislation prohibits anticompetitive business practices without specifying very well what those are. Agencies such as the FTC and DOJ, armed with economists and lawyers,  are responsible for making specific rules about what activities fall within and without the statutory pale. Some statutes can be quite specific. Environmental legislation may specify allowable quantities of toxic substances down to the parts-per-million and tax laws specify what earnings are to be taxed at what rate and what exemptions are available. Thus, we might expect agencies such as the EPA and IRS to exercise less rulemaking discretion.

Informal rulemaking is the most common method by which federal administrative agencies promulgate new rules. This is the default method by which an agency promulgates substantive rules. Informal rulemaking, known also as notice-and-comment rulemaking, is set out in Section 553 of the Administrative Procedures Act (APA). This section requires that proposed rules be published, and interested members of the public are given opportunity to comment on the proposed rule (See the Federal Register here). This process is important for several reasons. First, it allows an agency to gather additional information from members of the public about the consequences of a proposed rule. This information may help the agency formulate a rule more carefully tailored to achievement of its mandate. Second, members of the public are afforded the opportunity to become aware of new rules that may affect their rights and obligations before those rules take effect and to participate in the formulation of those rules when necessary. Third, because an agency must notify the public of any proceedings associated with the proposed rule, describe its statutory authority to make the rule, and describe the operation of the rule itself, transparency and democratic accountability for agency actions are preserved in the rulemaking process.

Sometimes formal or on-the-record rulemaking is required by statute. Section 553 of the APA states that “when rules are required by statute to be made on the record after opportunity for agency hearing, sections 556 and 557 apply…” Under sections 556 and 557, although notice is still given for a proposed rule, the comment procedure is replaced by a process nearly identical to formal adjudication. The agency must hold evidentiary hearings with affected parties and base its rulemaking solely on the findings made through this process. “Formal rulemaking generally involves broad, complicated questions of policy which will affect substantial numbers of people” (Andreen 1989, 26), and is quite rare (Breyer, et al.).


Where required by statute, agency action may require an adjudication rather than a rule making. As Kerwin and Furlong put it: “Rulemaking, as a legislative process, is designed to sort through facts from multiple sources in order to select standards that will apply generally” (2011, 51). Adjudication, on the other hand, “is best used in situations when the status of an individual (as a petitioner, potential beneficiary, or regulated party) is in question, and the application of known rules depends on facts about that individual or his or her activities that may be in dispute or in need of elaboration.” Hence, where the rules are well-established but an individual’s rights under the rules require close inquiry into disputed facts, e.g., Social Security benefits eligibility determinations, adjudication may be required to safeguard individual rights under relevant statutes.

Formal adjudications are quasi-judicial procedures: specific in scope, usually affecting a small number of designated parties, and are more backward-looking in application. The requirements for formal adjudications are addressed in sections 554, 556, and 557 of the APA. These proceedings are primarily distinguished by the requirement that a decision be preceded by a formal hearing and is required whenever prescribed by enabling legislation or whenever sanctions or liability is imposed by an agency.

However, courts have sometimes required informal adjudications or “paper hearings” which are not provided for in the APA. In Overton Park, the Court indicated that these paper hearings simply involve the maintenance of a paper trail to facilitate a court’s review of agency action. The court is looking for the decision maker’s reasoning process and will determine if the appropriate facts were considered in an appropriate manner. Many of an agencies more routine administrative decisions fall into this last category.


Rulemakings clearly allow an agency’s expertise to work. Congress delegates to agencies because agencies are populated by subject matter experts with the time to analyze the particulars of a problem and formulate appropriate rules to achieve Congress’ purposes. Moreover, more so than other institutional actors, agency personnel have the capacity to monitor effects of policy mechanisms and adjust rules in a dispassionate manner somewhat insulated from the vagaries of politics and the coordination problems of political actors.

When it comes to democratic accountability, rulemakings are a superior vehicle of agency policymaking. Rulemakings, due to the public notice requirement, certainly makes agency action more transparent, especially in the age of the internet. Interested members of the public can be made aware of decisions that affect their lives before those decisions take effect and may participate either through the comment or hearing procedures. Although a majority of the public may not avail themselves of this opportunity, the same selective attentiveness can be observed with respect to congressional activities (See Arnold’s The Logic of Congressional Action 1990). In both cases, organized and vested interest groups have more of an incentive to be involved, aside from occasional periods of scandal. Few citizens followed Anthony Weiner prior to his sexting scandal just as few citizens followed the activities of the IRS prior to the Tea Party tax exemption scandal. The problem of selective attentiveness is endemic to democratic governance and not peculiar to the administrative state.

When it comes to protection of individual rights, the case is more mixed. Adjudications give individuals an opportunity to contest the particular application of a rule to their specific circumstances in an environment with court-like procedural protections, including an administrative law judge whose independence is guarded by the Office of Personnel Management and whose decisions are reviewable by an Article III judge. But while adjudication may correct the misapprehension of material facts or resolve the misapplication of a rule, it is not the most appropriate forum to address defects in the rule itself which may unfairly impact the rights of an individual. Defects in the rule itself must be addressed in the rulemaking process. As already noted, in the rulemaking process, individuals and groups have an opportunity to forestall the adoption of a rule which impacts them unfairly. Thus, both adjudications and rulemakings serve important functions in safeguarding individual rights.


The Mighty Nation

There were several comments in my posts on nationalism, and I started to respond to them, but then decided to do a separate post instead.

In the previous posts, I questioned whether two politicians were laying on the nationalist rhetoric a little thickly. In one, John McCain referred to his Americaness as his most meaningful association. In the other, David Cameron defended the mythic achievements of the UK with great flourish. One commenter pushed back against the point I was making a little and did so quite charitably. He concluded with:

nationalism is something I hold near and dear to my heart. I love this country and I believe if everyone shared in this passion we would live in an even greater one.

Danielle responded to this comment with a question (which I paraphrase): Isn’t too much nationalism a bad thing?

I would say that I don’t think the question is one of degree, but of priority. Another way of putting it is to say that a nation can either be an instrumental good or a final good. Valuing our institutions because they accomplish some positive good for our persons, families, neighbors, property etc. is something qualitatively different from valuing the nation as one’s most meaningful association. I think our nation is great to the extent that it does good. Note that I value it as a means to other ends and its value is subordinated to those ends. When, heaven forbid, it becomes destructive of those ends, it becomes our duty to oppose it, even destroy it. Recall that great passage from the Declaration of Independence:

That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed, — That whenever any Form of Government becomes destructive of these ends, it is the Right of the People to alter or to abolish it, and to institute new Government, laying its foundation on such principles and organizing its powers in such form, as to them shall seem most likely to effect their Safety and Happiness.

But if the nation itself becomes the most meaningful association, all other values are subordinated to it and only valued in as much as they contribute to the preservation of the nation. The mention of Hitler in the comments illustrates the point I am making. Historian Paul Johnson expresses the danger quite pithily in his history of the 20th century:

As Churchill correctly noted, the horrors he listed were perpetrated by the ‘mighty educated States.’ Indeed, they were quite beyond the power of individuals, however evil. It is commonplace that men are excessively ruthless and cruel not as a rule out of avowed malice but from outraged righteousness. How much more is this true of legally constituted states, invested with all the seeming moral authority of parliaments and congresses and courts of justice! The destructive capacity of the individual, however vicious, is small; of the state, however well-intentioned, almost limitless. Modern Times (1983).


Obamacare Follow-up


After reading the comments following Danielle’s Obamacare post, I thought a little follow-up post focusing on some of the text and reasoning of the law might be in order. I may write again soon to discuss some of the recent controversies.

Through a huge legislative package like the PPACA, Congress sought to expand health insurance coverage to include virtually every American[1] while at the same time reducing spending. According to a Congressional Research Service report, the PPACA:

increases access to health insurance coverage, expands federal private health insurance market requirements, and requires the creation of health insurance exchanges to provide individuals and small employers with access to insurance. PPACA increases access to health insurance coverage by expanding Medicaid eligibility, extending funding for the Children’s Health Insurance Program, and subsidizing private insurance premiums and cost-sharing for certain lower-income individuals enrolled in exchange plans, among other provisions. These costs are projected to be offset by increased taxes and other revenues and reduced Medicare and Medicaid spending. The law also includes measures designed to enhance delivery and quality of care.[2]

In addition to requiring the creation of health insurance exchanges at the state level,[3] the law seeks to expand coverage through existing programs (e.g., Medicaid), strengthen previous laws intended to contain costs, and introduce new managed care programs intended to contribute to both goals.

The changes to U.S. health care made by the PPACA which bear most immediately on the present discussion have to do with its guaranteed issue, community rating, and minimum essential coverage provisions. These provisions, taken together, are the centerpiece of the legislation. Along with the expansion of Medicaid, these provisions were at the heart of the legal challenge and the most recent controversies. Therefore, I think it worth reviewing how they work, what the require, and the reasoning behind them.

The guaranteed issue provision forbids health insurance providers from establishing:

rules for eligibility (including continued eligibility) of any individual to enroll under the terms of the plan based on any of the following health status-related factors in relation to the individual or a dependent of the individual: (A) Health status; (B) Medical condition (including both physical and mental illnesses); (C) Claims experience; (D) Receipt of health care; (E) Medical history; (F) Genetic information; (G) Evidence of insurability (including conditions arising out of acts of domestic violence); (H) Disability.[4]

In other words, the new law forbids any insurance company from denying health insurance coverage to any individual for virtually any reason. Each person who applies is guaranteed health insurance, even if, because of a pre-existing condition, the term “insurance” does not really apply.

Of course, insurance is an arrangement in which person A agrees to pay entity B now, and in exchange entity B agrees to assume the risk of a given future occurrence with respect person A. If the event for which entity B assumes the risk has already occurred and is an on-going concern, there is in fact no insurance at all. In that case, person A is simply paying entity B presently for a service presently provided. In the health care industry, this is the difference between paying for health insurance and paying for health care. Since a ninety percent chance of a one thousand dollar expense in the future[5] is less costly than a one hundred percent chance of the same expense in the present,[6] paying for health care will be more costly than paying for genuine health insurance.

Insurance companies facing this requirement might simply charge more costly individuals a higher premium. The higher premium may in turn prove so prohibitive to an individual with a preexisting condition as to amount to a denial of coverage. This is where the community rating provision comes in. It requires that:

With respect to the premium rate charged by a health insurance issuer for health insurance coverage offered in the individual or small group market–

(A) such rate shall vary with respect to the particular plan or coverage involved only by–

(i) whether such plan or coverage covers an individual or family;

(ii) rating area, as established in accordance with paragraph (2);

(iii) age, except that such rate shall not vary by more than 3 to 1 for adults (consistent with section 300gg-6(c) of this title); and

(iv) tobacco use, except that such rate shall not vary by more than 1.5 to 1; and

(B) such rate shall not vary with respect to the particular plan or coverage involved by any other factor not described in subparagraph (A).[7]

In other words, not only must insurance companies accept anyone who applies for coverage, they may not consider preexisting conditions in determining what premium to charge.[8]

As even a casual observer would be keenly aware, the guaranteed coverage and community rating provisions, taken together, while helpful to individuals with preexisting conditions, create a set of incentives for individual health care consumers that threaten to undermine the entire health insurance market. Rational individuals will not likely be inclined to pay premiums now for coverage they may receive at any time for the same rate. The concern is that individuals will find it perfectly rational to sign up for health “insurance” after a costly diagnosis or on the way to the hospital following a costly injury.[9] How does Congress legislate its way out of this legislatively engineered dilemma? Simply require all individuals to get health insurance. That is where the minimum essential coverage provision, or individual mandate, comes in.

The minimum essential coverage provision requires that “an applicable individual shall for each month beginning after 2013 ensure that the individual, and any dependent of the individual who is an applicable individual, is covered under minimum essential coverage for such month.”[10] In addition to any government-sponsored program, “minimum essential coverage” is defined as “coverage under an eligible employer-sponsored plan”, “a health plan offered in the individual market within a State”, “a grandfathered health plan”,[11] or “such other health benefits coverage, such as a State health benefits risk pool, as the Secretary of Health and Human Services, in coordination with the Secretary, recognizes for purposes of this subsection.”[12] Any “applicable individual” who fails to comply “for 1 or more months” is subject to “a penalty with respect to such failures.”[13]

On March 21, 2010, the House of Representatives gave final approval to the 2,500 page Patient Protection and Affordable Care Act. Two days later, President Obama signed the bill into law. One commentator described the occasion this way:

After a century of trying, the United States has joined the world’s other major industrialized nations in providing all its citizens with access to essential health care…The Affordable Care Act will usher in a new era in American health care—one in which every American has access to affordable health insurance coverage and no one is turned away simply because they have a preexisting condition…Reform is a historic victory for all Americans.[14]

Of course, not every American saw this particular reform as a “victory.” Not one Republican in either chamber voted for the bill, and the very same day the bill became the subject of a legal challenge destined for the Supreme Court.


[1] The Congressional Budget Office estimates that the PPACA will increase the proportion of the population with health insurance from 83% to 94% by 2019. Michael Tanner, health policy analyst at the Cato Institute, points out that “roughly 47 percent of the newly insured…will…be put into the Medicaid or SCHIP programs. Given that roughly a third of physicians no longer accept Medicaid patients, these individuals may still find significant barriers to access, despite their newly insured status.” Bad Medicine: A Guide to the Real Costs and Consequences of the New Health Care Law. Washington, D.C.: Cato Institute (2011).

[3] Each state is required to establish an “American Health Benefit Exchange” by January 1, 2014 “that facilitates the purchase of qualified health plans” and “is designed to assist qualified employers in the State who are small employers in facilitating the enrollment of their employees in qualified health plans offered in the small group market in the State.” 42 U.S.C.A. § 18031 (West). The exchanges are meant to spur competitive pricing for health plans. The Secretary of Health & Human Services will contribute funds to each state for the establishment of the exchange as well as establish criteria for eligible plans. Each exchange is required to operate as a state agency or a non-profit entity established by the state and to be financially self-sustaining by 2015.

[4] 42 U.S.C.A. § 300gg-1 (West).

[5] p(.9) * 1000 = $900 discounted to present value.

[6] p(1) * 1000 = $1000 at present value.

[7] 42 U.S.C.A. § 300gg (West).

[8] The non-partisan RAND Corp. recently conducted a study for the AP predicting that premiums for young healthy individuals could rise by as much as 17%. Some studies suggest that rates for young men could rise as much as 30%. See Carla Johnson, “Health Premiums Could Rise 17 Percent for Young Adults,” AP, March 29, 2010. Its too soon to say for sure what the overall effects will be.

[9] “Without the individual mandate and penalty in place, the argument goes, people would simply ‘game the system’…which would result in increased costs for the insurance companies.” Florida ex rel. McCollum v. U.S. Dept. of Health & Human Services, 716 F. Supp. 2d 1120, 1129 (N.D. Fla. 2010).

[10] 26 U.S.C.A. § 5000A (West).

[11] This grandfathering will not help individuals in the individual market for health insurance who renew annually. When these individuals renew, they are subject to the same minimum essential coverage standards as everyone else. Thus, as millions of Americans have recently discovered, they may not keep their old coverage—at least not for very long—if it does not meet the minimum criteria under the law.

[12] Id.

[13] Id.

[14] Karen Davis, “A New Era in American Health Care” (2010).

Math Ranking Down, Reading Up for U.S. Students

In a recent Program for International Student Assessment (PISA) ranking, the U.S. fell in its math rankings from #34 to #36, while it went from not ranked in reading to #23, all in a 6 year time frame.  Big “surprises” are China which wasn’t surveyed in 2006, but leads both categories along with other Asian countries like Hong Kong, Singapore, Japan, South Korea, and Taiwan.  Canada is ranked #12 in math (down from #7) and #8 in reading (down from #4) from 2006-2012. This survey is based off of testing 15 year olds on basic academic skills.  One criticism that comes to mind, especially in countries like China, is that students only have to attend school for 9 years.  So, families, especially those in rural areas, often elect not to continue educating their children after 15.  This is a sample selection problem. In simple terms, the students tested by the PISA will only be the students whose families want to keep them in school, which usually includes the rich, smart, educated or those with highest educated earning potential.  The students who aren’t as smart or have a smaller potential to earn more money by continuing education drop out and work in the family business or on a farm. Therefore, the PISA rankings are slightly bias because they only sample China’s best students.  Now, a case can be made in other countries it is the same and I agree that it is true to some degree. In developed countries some states or provinces allow students to drop out also at 15 or 16, but high school drop out rates are small.  (They are roughly 7% in the U.S.) So, although this assessment is an indication of where countries rank side-by-side there are some issues with devising policy upon it.  Are there any other issues you see?